457 B.R. 919
Bankr. M.D. Ga.2011Background
- Debtors Johny Brown and Kylee Brown, and plaintiffs Dion Griffis and Wilson Griffis, are involved in a bankruptcy and related adversary proceeding against the Browns.
- Plaintiffs allege that Mr. Brown diverted loan funds intended for Wilson Family Foods to a joint personal account with Mrs. Brown for their personal use.
- Plaintiffs seek nondischargeability of a debt under 11 U.S.C. §§ 523(a)(2)(A), 523(a)(4), and 523(a)(6) in the amount of approximately $2,100,000 plus interest.
- Mrs. Brown was initially unnamed in the complaint; the proposed amended complaint adds allegations that she knew or should have known of the diversion and lived beyond their means.
- Defendants moved to dismiss for failure to state a claim; plaintiffs moved to amend to add allegations against Mrs. Brown; the court treated the motion as a Rule 12(c) judgment on the pleadings and granted in part and denied in part.
- The court ultimately grants dismissal of the fraud claim under § 523(a)(2)(A) against Mrs. Brown, but denies dismissal of the embezzlement, larceny, and willful and malicious injury claims, and grants the motion to amend.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Fraud claim against Mrs. Brown under § 523(a)(2)(A) | Mrs. Brown knew or should have known of the diversion and omissions. | Mrs. Brown had no involvement with loan procurement or Wilson's finances; no duty to speak established. | Fraud claim dismissed against Mrs. Brown. |
| Embezzlement and larceny claim against Mrs. Brown under § 523(a)(4) | Mrs. Brown participated in spending diverted funds for personal use. | She was not an officer or employee and had no direct involvement in finances. | Embezzlement and larceny claims survive; plaintiff states a claim. |
| Willful and malicious injury under § 523(a)(6) | Mrs. Brown's spending of Wilson funds for personal benefit was willful and malicious. | Not specified; lack of control or intent attributed to Mrs. Brown. | Willful and malicious injury claim survives. |
| Plaintiff's motion to amend the complaint | Amendment adds necessary allegations against Mrs. Brown; no undue delay or prejudice. | Amendment would be futile; evidence will show alcoholism and lack of involvement. | Court grants amendment; claims against Mrs. Brown can proceed on remand. |
Key Cases Cited
- Fuller v. Johannessen (In re Johannessen), 76 F.3d 347 (11th Cir. 1996) (elements of fraud under 523(a)(2)(A))
- AT&T Universal Card Servs. v. Mercer (In re Mercer), 246 F.3d 391 (5th Cir. 2001) (duty to speak may create fraudulent omission liability)
- Kearns v. Ford Motor Co., 567 F.3d 1120 (9th Cir. 2009) (particularity requirement for fraud pleadings)
- Jones v. Greninger, 188 F.3d 322 (5th Cir. 1999) (fraud pleadings and timelines in Rule 12 motion context)
- Maldonado v. Dominguez, 137 F.3d 1 (1st Cir. 1998) (scienter pleading standards)
- Haemonetics Corp. v. Dupre, 238 B.R. 224 (D. Mass. 1999) (knowledge alone may confer liability when paired with participation)
- Hollis v. Bank of New England (In re Hollis and Co.), 86 B.R. 152 (Bankr. E.D. Ark. 1988) (trustee pleading standards in fraud matters)
- Wright (In re Wright), 282 B.R. 510 (Bankr. M.D. Ga. 2002) (emphasizes elements of larceny and embezzlement)